A Different Take on Pari-Mutuel Takeout

The following was submitted by David Carrico, who spent 16 years with Churchill Downs, four years with TVG, and also was a consultant. Carrico said he's now an "observer" of the industry and believes there is more than meets the eye to a recent development: a pari-mutuel tax refund in Kentucky. This is an interesting take on takeout, which is frequently discussed but not tackled with a comprehensive industry plan.

Business got you down? Simple, just raise prices.

Halloween is an appropriate season for a look at the ghoulish pari-mutuel tax and the goblin called “takeout.” Both are ghostly and, even in our midst, they’re invisible.

Virtually unnoticed, the Kentucky Revenue Cabinet announced in October that Churchill Downs had been refunded a portion of pari-mutuel tax for certain operating periods. The reasons, like the tax itself, are confusing.

Just who pays pari-mutuel tax? Like liquor and cigarettes, it comes right off the top of the sale of every bottle, pack and, yes, bet. Yet, despite the fact its customers are the ones taxed, Churchill and other tracks quietly liken this tariff to a portion of operating margins and they, not the state’s general fund, should be entitled to this “sin tax” collected on every dollar bet. Track lobbies to reduce the tax are attempts to garner a larger share of the takeout, not magnanimous crusades on behalf of the wagering public.

Note: The 1.5% or 3.5% depends upon on-track, average daily handle totals; these percentages are against each full dollar bet, and when applied to the 20 cents typically withheld (takeout, or the actual total cost of the wager), the effective tax goes up to 17% or nearly three times that of Kentucky’s sales tax. For many years, Churchill and Keeneland were above the ($1.2-million) threshold requiring 3.5% withholding, while Turfway, Ellis Park, and the rest of Kentucky’s tracks collected 1.5% from their customers. Keeneland slipped under the mark several years ago, and now Churchill appears to be doing less business on-track than previously. On track levels have seen slippage due to overall business trends and shift of handle from traditional on-site business to off-site platforms including account wagering.

Getting a portion of the general fund paid in by bettors in this case serves to reward Churchill for declining business and is tantamount to raising the takeout, the total cost of the bet to the patron. In fairness, Churchill didn’t pen a statute that is on soft constitutional grounds. In fact, it could be argued proceeds were directed back to its customers in the form of projects like a high-definition television signal and facility lighting. Still, a tax paid by one (the betting public) and returned to another (Churchill) doesn’t pass the smell test.

The problem is most fail to appreciate higher bet costs result in reduced winnings and increased losses to bettors. Just as when the cost of poker goes up when the game host announces, "For every $10 pot, the ‘rake’ is going from 50 cents to a $1.25 because I’m a little short,” a visit to Churchill turns out to have been more expensive now than in the spring.

The pari-mutuel tax in Kentucky should be reduced to 1.2% which, based on a 20% average takeout, approximates the 6% state sales tax. It should be redefined to match up with a track’s total handle mix within the state – on-track and off-site, including account wagering. Finally, the 1.2% should be subtracted from allowable takeout amounts so as not to burden the ones paying it.

While the majority of racegoers haven’t done the math, they have concluded something embedded in popular lexicon: "You can’t win at the races." Regardless, racing is fast-approaching welfare status, with the benefactors being slots and its shrinking fan base. Not at all pretty.